Ruminations on the Distortion of Oil Prices and Crony Capitalism: Selected Writings

Summary

At great cost and risk to the American and world economies, consumers are ripped off billions of dollars every day by oil interests and their malevolent influence on market pricing mechanisms. Its essential Americans and oil consumers throughout the world understand where the money they pay for oils downstream products goesincluding the money paid at the pump, the money paid to heat their homes, and the money paid for the array of other petroleum-based products. In Ruminations on the Distortion of Oil Prices and Crony Capitalism, author Raymond J. Learsy not only discusses the distortion of oil pricing, but also focuses on effects of the crony capitalism that has enriched a select few and left Main Street in the lurch as a result of government mismanagement, moneyed influence, and craven oversight. This collection of previously published writings shows how speculators ratchet up the prices of basic material goods essential to daily lives. Learsy describes how ceding the determination of those prices not to the laws of supply and demand but predominantly to gambling dens on the trading floors of commodity exchanges as well as the price fixing collusion of producer nations (OPEC) is crippling to the worlds economy.

Focusing as well on Wall Streets corrupting influence on the price of oil, gasoline, and other commodities, Ruminations on the Distortion of Oil Prices and Crony Capitalism provides an overview of the basic and important theme: the United States enslavement to oil and the moneyed interests inextricably tied to it.

Book Preview

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews.

iUniverse books may be ordered through booksellers or by contacting:

iUniverse LLC

1663 Liberty Drive

Bloomington, IN 47403

www.iuniverse.com

1-800-Authors (1-800-288-4677)

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

Any people depicted in stock imagery provided by Thinkstock are models, and such images are being used for illustrative purposes only.

ALSO BY RAYMOND J. LEARSY

Over A Barrel: Breaking Oil’s Grip on Our Future

Oil and Finance: The Epic Corruption 2006-2010

Oil and Finance: The Epic Corruption Continues 2010-2012

ACKNOWLEDGMENTS

First, my thanks to my ever-patient wife, Melva Bucksbaum, who assiduously and cheerfully served as my editor in chief these many months, in spite of my temperament and for which I am forever grateful.

And also my deep thanks to my administrative assistant, Beth Rybczyk, for her unflinching assistance and help in navigating the flood of compositional minutiae that comprise the contents of this book.

INTRODUCTION

Any attempt to weaken oil’s stranglehold on our economy, our environment, and our national security will be treated by oil’s beneficiaries as an act of aggression, even approaching an act of war. I have tried to make readers clearly understand all this in my various previous commentaries, and again here throughout this book. The great ally of oil interests, both commercial and political, is misinformation. Specifically, misinformation served up in amplitude. This lulls all to sleep by encouraging them to believe blindly in the efficacy of the marketplace: that the price of oil and its availability are standards derived from a free market responding to the true vectors of supply and demand. This is not the case, and herein lies the tale of these ruminations as they apply to the oil industry, its flacks, much of the financial sector wedded to the oil mavens, our bought-and-paid-for government, and its quiescent oversight agencies. In addition to this, of course, are the enabling commodity exchanges and their malign role as the roulette wheel to the distortions of oil and oil product pricing (gasoline, heating oil, and so on) paid for out of the pockets of America’s everyman and -woman.

The commentary in this book not only touches on the distortion of oil pricing but also on the grotesque distortions of the crony capitalism that has enriched the few and left Main Street in the lurch, largely as a result of government mismanagement, moneyed influence, and craven oversight. The damage of crony capitalism reaches into the very sinews of our lives. The writings collected in this book show how speculators—and all too often government-backed investment banks with proprietary trading desks and access to near limitless funding through the Federal Reserve or from the federally insured monies of their depositors (monies ironically deposited for safekeeping)—ratchet up the prices of the basic material goods essential to our daily lives, such as gasoline and foodstuff, thereby ceding the determination of those prices not to the laws of supply and demand but predominantly to gambling dens on the trading floors of our balefully unmonitored commodity exchanges.

When he appeared before the Senate Committee on Government Affairs as long ago as November 1, 1990, Leon Hess, a prominent figure in the oil world and the heralded founder and chairman of Hess Oil, testified, I’m an old man, but I’d bet my life that if the Merc [New York Mercantile Exchange] was not in operation, there would be ample oil and reasonable prices all over the world, without this volatility.¹

Flash forward twenty-one years, when Rex Tillerson, the CEO and chairman of ExxonMobil, the world’s largest publicly owned oil company, testified before the Senate Finance Committee on May 12, 2011. In answer to Senator Maria Cantwell’s (D-WA) incisive questioning,²Mr. Tillerson stated that the price of oil should be $60/barrel to $70/barrel, or $30 to $40 less than the price of nearly $100/barrel quoted on the commodity exchanges at that time.

During those hearings, commentators pointed out that speculation has vast impact on price distortions, wherein more than 70 percent of oil trading on the commodity exchanges is done not by producers or consumers, rationally hedging their production or consumption needs, but by speculators/traders who neither produce nor consume the oil they trade through the exchanges. Exploring the ramifications of these issues, this book’s commentary touches on the reasons why we accept these unconscionable distortions in spite of the enormous cost to the body public. To frame all this in quantifiable terms, some twenty million barrels/day are consumed in the United States, which, at Tillerson’s lesser $30/barrel figure, brings a bonanza of an additional $600 million/day, or $219 billion/year, to oil interests. And that is just out of the pockets of American consumers. It is one of the greatest heists of all time, and it represents a massive failure of governance and oversight, while simultaneously exposing the complicity of a somnolent press.

Most pointedly, this book’s collected ruminations touch on Wall Street’s corrupting influence on the price of oil/gasoline and other commodities. Not to be left out of the picture are the policy distortions, or lack thereof, influenced by the industry itself and foisted upon our political representatives, as well as our ineffectual government agencies, be it the Commodity Futures Trading Commission (CFTC), the Department of Energy (DOE), Congress, and even our courts and their jejune interpretation of sovereign immunity, which gives the OPEC cartel’s national oil companies free rein to roll over us.

Along with commentary on OPEC’s oil production and pricing machinations, this book’s ruminations also touch on the malevolent impact of oil’s massive revenue stream in the indoctrination of jihadist dogma and the grim political upheaval and messianic fanaticism touching so much of the world, from the formation of the Taliban to the horrors of Mali—not to mention 9/11.

This compilation of writings is meant to provide an overview of the basic and important theme described above: our enslavement to oil and the money inextricably tied to it. The book’s format is meant to enhance the subject matter by providing both the means to further an understanding and to engage in coherent and meaningful discussion. The book’s focus may meander occasionally to issues of concurrent interest, with general observations on the following topics: energy independence; national security; politics; shale gas and oil; fracking; commodity exchanges; OPEC; the US Department of Energy (DOE); the Federal Reserve; the Strategic Petroleum Reserve (SPR). To some extent, the writings do repeat issues, but only insofar as many of the themes are so interrelated that they overlap. However, any repetitions are meant to reemphasize importance and to clarify and substantiate the underpinnings of the observations at hand.

Much is written with a touch of what I consider rightful anger. Anger that rises from my years of experience in the commodities trading field. I have written extensively on these issues and witnessed the distortions brought about by the transmutation of trading in physical commodities to trading in commodity future derivatives on the Commodities Exchanges (what I have termed paper barrels). Together with the malign impact of lobbying by both the powerful oil industry and Wall Street, all this has distorted government policy, crippling Main Street in the process.

Add to this mix the vast distortion to the free market occasioned by the sinister machinations of the OPEC oil cartel, which was the subject of my earlier book, Over A Barrel: Breaking the Middle East Oil Cartel. Clearly, I am not alone in feeling rightful anger, as that book elicited such comments as:

This book provides a very insightful analysis of the powerful grip that OPEC has over a very important natural resource, why there is no shortage of oil, and why oil prices should be much lower. It also provides all the necessary rationale for standing and defeating this economic evil.

—Henry Kaufman

President of Henry Kaufman & Company

Author of The Road to Financial Reformation: Warnings, Consequences, Reforms

Finally, I believe that a knowledgeable consumer is a powerful consumer, and these collected writings are meant to contribute to that knowledge.

[AUTHOR’S NOTE: The date of the original blog post appears at the start of each piece. Please refer to these throughout in order to remain aware of the chronology of the writing.]

THE NEW YORK TIMES CONTINUES TO PUMP UP THE PRICE OF OIL, MUCH TO THE OIL INDUSTRY’S JOY

Posted: 01/02/12, 5:04 AM EST

No critical commodity moves as much on rhetoric, rather than supply-and-demand fundamentals, as does crude oil. Over the years few news services, perceived as being disinterested purveyors of news and information, have lent their imprimatur more to the upward distortion of oil prices than the New York Times.

In keeping with what now has become a sorry tradition, the New York Times on Thursday gave the oil patch and its allied interests good reason to pop champagne corks two days early in celebration of the New Year. Assuming a mantle of authority, the New York Times presented to its readership, packaged in the babble of well-honed oil industry mantras and conveyed to us as received wisdom from on high, illuminations the likes of which a well-oiled oil industry flack would have been embarrassed to disseminate. The good scribes of the Times, in their lead story in the business section, told us with the headline, Oil Prices Predicted to Stay above $100 a Barrel through Next Year. ³

The article ends with this: Consumers have this belief that prices will either go up or they will remain at elevated levels. The reportage fills three-quarters of a New York Times page, regaling us with reasons why, at the very least, elevated levels will remain; all with the subtext that we should celebrate such an outcome, as prices might very well go higher. This kind of reporting undoubtedly had the oil gang cheering, as they recently reported bottom line record earnings with those oil prices at current levels. Meanwhile, the rest of the country is still in a deep funk.

The article also made us feel better by pointing out that The United States economy managed to cope this year despite triple digit prices for barrels of oil. Such is the information we are fed by the New York Times scribes, seemingly safe at their business desk sinecures, frighteningly oblivious to a near 9 percent countrywide unemployment rate and the millions out of work, not to mention the millions evicted from their foreclosed homes, none of whom seem to cope with the prevailing circumstances in the least.

Other than its references to the playing out of foreign policy issues, such as Iran’s threat to blockade the Strait of Hormuz and all that would entail, the Times hastens to instruct us that oil prices have an innate right to hover at their current astronomical heights. This perspective becomes clear when the Times states that Many governments in the Middle East spent heavily on social assistance programs in response to the unrest of the Arab Spring and are depending on higher prices to meet their budgets. Now, does that make you feel warmer up there in Maine?

And when it comes to higher prices, there is no mention of the breakdown of our oversight agencies, such as the Commodity Futures Trading Commission (CFTC) and its failure to rein in excessive speculation in oil prices. [Please see Time to Dismiss the CFTC Chairman and His Commissioners,Huffington Post (blog), December 27, 2010.⁴] This is not just my layman’s opinion. Much more significantly, it is also the opinion of Rex Tillerson, CEO of the world’s largest oil giant, ExxonMobil. To his great credit, during his testimony before the Senate Finance Committee in May 2011, Tillerson expressed his exasperation that the then current price of oil at $100/barrel incorporated some $30 to $40 of its price as a result of speculation. [Please see Are Our Leaders Hearing ExxonMobil CEO Rex Tillerson?Huffington Post (blog), May 17, 2011.⁵]

Nor did the article make any reference to that fundamental game changer: the vast deposits of low-cost natural gas. Through new drilling techniques, such as environmentally evolving fracking, enormous reservoirs of shale gas have been identified in dimensions barely understood just a few years ago; enough to meet domestic needs for the next 150 years. The potential is so large, a consensus is building that it will lead to American energy independence.

In years past, oil and natural gas prices moved up and down in near lockstep. Such was the case when oil prices peaked at $147/barrel in the summer of 2008 (helping to bring on the housing crisis and the financial meltdown in September of that year). The price of natural gas at that time was near $15.00/MMbtu (one million British thermal units, the term used to measure heat and energy). Today, while the price of oil rests near $100/barrel, as quoted on the New York Mercantile Exchange (NYMEX) for West Texas Intermediate (WTI), the price of natural gas has dropped to under $3.00/MMBtu. At that price for natural gas, the comparable energy quotient in a barrel of oil would bring its price down to less than $20/barrel. Clearly, with a differential of this magnitude and with natural gas being environmentally friendlier than oil-based commodities like gasoline, some substitution will begin to weigh on the consumption of oil, whether in home heating or converting trucks to natural gas fuel rather than gasoline/diesel. It is a trend only beginning now that will have major impact on the need for and consumption of crude oil in the years ahead.

Yet, here again, instead of reporting clearly on this development and its enormous potential, the New York Times engaged in reportage bordering on yellow journalism [please see New York Times Flays Natural Gas … June 28, 2011⁶], including two articles filled with conjecture bordering on disinformation: Insiders Sound an Alarm Amid a Natural Gas Rush⁷ (June 25, 2011) and Behind Veneer, Doubt on Future of Natural Gas⁸ (June 26, 2011). Furthermore, this reportage places the entire shale gas revolution into question, interjecting such terminology as Ponzi scheme,dot-com bubble, and so on. This in the face of billions of dollars invested in the shale gas and shale oil plays by such doubters as ExxonMobil, Shell, Chevron, Statoil (the Norwegian national oil company), CNOOC (the oil company owned by the Chinese government), and Total (the French oil behemoth). The list goes on. But the Times instructed us otherwise, thereby helping to keep oil prices on the ascent by vesting us with the ignorance needed to accept high and manipulated oil prices unquestioningly.

It has been a tradition of distortion or misinformation dating back years—whether sweeping the manipulations of OPEC under the rug, or heralding the pronouncements of that oil price manipulator par excellence and OPEC’s premier protagonist Saudi Arabia, without a questioning eye. [Please see The New York Times Continues Its Fawning Coverage of Saudi Oil Policies, March 22, 2010.⁹]

Sadly, the New York Times, on the issue of how oil prices are determined, has become a leading apologist of industry excess